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Article by listed accountant Thea Haddon
Dear Future Business Owner
There is a movement in the employment market at the moment towards independence.  At the moment there is not much job availability within the more conventional market place. Many innovative and ambitious people are choosing self-employment either out of necessity or frustration rather than facing the insecurity of working for a boss. This means they are taking ownership of your own business.
There are two options available in the self-employment market:  you can either start your own business from scratch, which has challenges of its own, or you can buy an existing business or franchise.
If you decide to buy a business there are a few basics to keep in mind.      

Where are you looking for a business to buy?

  • There are numerous places that offer information on business for sale in South Africa. A brokerage is a good place to start as they are more in tune with the legal requirements that come with selling an ongoing concern. You should also keep in mind, though, that they are there to make a profit for their client so they will try to sell at the highest price possible.
  • Gumtree, OXL, Junkmail and the like: you can pick up good bargains here if you know what to look for.  For the inexperienced buyer I would advise getting the help of a broker or consultant, just to make sure you’re not picking up a problem. Their job will be to get the best deal for you at the best price for you.

What industry suits you?

  • What is your current profession? What industry do you know? What experience do you have? Are you going it alone or with someone else? What is it you’ve always wanted to do? Ask yourself these questions and write your answers where you can refer to them. 
  • The industry you choose should suit not only your pocket, but your shared ability to perform. The more knowledge you have the better. Write a list of what talents and abilities you have at your immediate disposal. You may need to acquire more where you feel you are lacking.
  • Different industries have different turnaround times, different legal and safety requirements and different workforce obligations. 

How are you going to buy the business?

  • Are you going to buy the whole lot, assets, liabilities, staff compliment, contracts or are you just going to take over the assets and the clients?
  • The different types of sale agreements have both advantages and disadvantages. These should be carefully examined to determine what would be to your best advantage before a decision is made. 
  • Remember too that the nature of the sale will also determine what information the seller needs to disclose to you.

What information the seller must give you regarding his business?

  • The Seller must make full disclosure on all aspects of the business in negotiation.
  • Financial statements and/or management reports.
  • Information on any ongoing contractual obligations if you are going to take over the contracts.
  • Information on any possible legal proceedings, past or present, which could affect the future of the business, either operationally or financially.

Determining a good price to pay?

  • The price you eventually pay for a business is usually a multiple of the net profit before interest income and Tax. This is why it is important for the seller to give you Financial Statements.
  • The possible future income can be determined after examining financial statements and any contractual obligations, whether written, verbal or assumed.
  • Make sure you know the full implications of buying a business with an assessed loss.

Negotiating the sale agreement?

  • If this business was built around the seller, is there going to be a hand over period during which he introduces you to all the clients and suppliers?
  • Does the seller have any personal relationships with any stakeholders that could affect any future potential profit.
  • Is there going to be a restraint of trade agreement?

Taking over the business?

  • Determine when you want to take over the business. Discuss this with the Seller and start planning all the practical activities necessary for a smooth transition.
  • If there is a transitional phasing out period? If so, how long will it be? Make sure that all relevant staff aware of the transfer of authority.

Your first year?

  • Have meetings with relevant staff as often as you can until you feel comfortable that you are up to speed.
  • Familiarize yourself with relevant stakeholders and their functions. This will help you determine the strengths and weaknesses within your business.
  • Monitor financial activity constantly: invoices, payments and orders. This is where your accountant becomes your best ally.
  • Take a few months to find your rhythm give others a chance to get to know how you operate. Change, unless it is a very visible and immediate improvement, is often not easy to accept. A little patience in the beginning will pay off in the long run.

About Yourself

  • Be bluntly honest with yourself. It is no good trying to convince yourself if all your instincts are warning you not to go ahead with the purchase.
  • Ask for advice. There are many good sources of wisdom.   A trusting relationship with an Accountant or Financial Advisor will be greatly advantageous during this time. They can guide you through the process, make you aware of possible pitfalls and offer wholesome advice in the beginning.
  • Keep a journal or diary of events that you can refer to should you need it.  It will be a great tool for you in the first months.
  • And have fun! We were not put on this planet to be miserable. While we all know we have to work hard to get ahead, there is nowhere in the rulebooks where it says we’re not allowed to have fun at the same time.
Issued by Thea Haddon (CIS)
Business Accountant in Practice
Haddon Plus (Pty) Ltd